The internet isn’t a tax-free zone: Get over it

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After the Senate’s passage last week of legislation titled “Internet Sales Tax Amendment” indicated general support for the collection of sales tax on out-of-state transactions, the internet itself lit up with a familiar array of misleading and scary headlines, whining, and general bitching about government.

In truth, the reality is neither all that complicated or even scary. For those of us who are taxpayers in one of the 45 US states with a sales tax, we owe our states the tax on our purchases of covered products, whether we buy them in state, out of state, over the phone, or over the web. For those purchases for which sales tax is not collected by the seller at time of purchase — for example many internet transactions — we are required to pay the equivalent Use tax. Typically that tax is supposed to be paid on an individual’s state tax return.

Unfortunately, compliance is very low, so many states have been seeking to force out-of-state merchants to collect the tax on their behalf — the way in-state merchants already do. This wouldn’t be the first time states have created a special mechanism to ensure collection when it was financially important. For example, in the case of privately-transferred vehicles, the sales tax is often collected when the vehicle is registered by the new owner.

Quit the whining

None of the serious proposals for the collection of sales tax on the internet — including the Senate amendment — actually include any new taxes. Everyone is already supposed to be paying the tax (or an estimate of the tax in some cases where that is allowed as an alternative). Those who aren’t paying the tax are violating the law and cheating their state governments out of revenue. The distinction between taxing and tax collection is important here. Taxpayers who have a problem with high sales taxes may have a legitimate beef. They should take it up with their state government that imposes the tax, not with efforts to create a fair tax collection environment.

In fairness, before all our anti-tax readers start flaming me as a shill for the big-box retailers, better tax collection on the internet isn’t actually likely to save Best Buy and others in the long run. Once the playing field is leveled, nothing will stop Amazon or Overstock.com from putting distribution centers in every major metropolitan area and offering same-day delivery — or even from opening showrooms. No doubt that is one reason Amazon was so happy to settle its sales tax dogfight with California when push came to shove.

Another thing you won’t find in the scary headlines proclaiming some sort of “Internet Sales Tax” is that many, if not most, of the supporters of the latest initiative are conservative Republican governors and senators. To them it is a matter of states’ rights, with republican Senator Lamar Alexander who co-sponsored the amendment summing it up, “This is an opportunity for us to express our support for this principle of states’ rights and to give governors and legislatures across the country a chance to treat businesses and taxpayers in the same way – and to stop picking winners and stop picking losers in the marketplace.”

Lamar and others — especially governors — have good reason to be motivated to broaden collection powers. Tens of billions of dollars of state sales tax revenue are lost each year because they are not collected by out-of-state sellers or paid later by state residents. Ironically, Washington State, which benefits the most from the roaring growth of Amazon, also benefits because Amazon has to collect sales tax on its behalf.

It’s also important to note that the amendment passed by the Senate is little more than window dressing at this point. It is non-binding and only “allows” Congress to pass legislation that would let states decide whether they enforce the collection of their sales tax on out-of-state vendors selling to their residents. It absolutely doesn’t require them to do so. The Senate’s amendment is a long way from actually changing sales tax reality, but it will lend additional weight to negotiated settlements like the one reached in California.

Ebay, and other large third-party selling sites, are interesting outliers. Unlike an Amazon, which already knows the category for each product it sells, and can fairly easily collect tax effectively, eBay is much more of a wild frontier. Even if eBay itself won’t have to collect tax on every transaction, eBay sellers doing more than $1 million a year in business would have to start collecting taxes in many more jurisdictions.

Simplification is an important quid pro quo

Internet sellers have correctly complained that complying with the myriad of state — and worse yet county and local — sales tax rules would be nearly impossible. In exchange for agreeing to support the idea of collecting tax from residents of additional states, they’ve demanded compliance with a streamlined set of unified tax categories called the Streamline Sales and Use Tax Agreement (SSUTA). This makes automated collection of sales tax calculation fairly straightforward for large sellers. Small sellers would be exempted under a provision waiving the tax collection for vendors with under $1 million in sales.

Affiliates rejoice: Sword of Damocles falls harmlessly

The Sword of Damocles hanging over the head of all affiliates of internet merchants has been the fluctuating situation with out-of-state sales tax collection. Amazon and others were quick — as in minutes, not hours or days — to drop all affiliates from states that enacted provisions authorizing them to force sales tax collection on out-of-state vendors. Once there is uniform treatment of sales tax collection across all vendors and states, that threat is removed and business that rely on their affiliate relationship will face clear sailing ahead.

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Omnidosiac

I was trying to read the article fairly and then I got to the Lamar Alexander quote. In an article on a tech site. To defend a law change to the internet. Perhaps SOPA-boy isn’t the person with which you’d most like to be aligned on this issue?

http://www.cardinalphoto.com David Cardinal

Yeah, good point. The quote isn’t designed to align with him, but you’re certainly right that SOPA was hardly a libertarian position. One reason I used the quote was to highlight a fact I found very surprising, that conservative lawmakers were in favor on the basis of state’s rights (versus the conventional wisdom that it is a federal power grab to deal with the issue of Internet taxation).

To reiterate though, the article isn’t quoting Alexander as a model, but as an example of the states’ righters position on the issue. If I could only quote from politicians I agreed with, it’d be hard to find quotes:-) It was interesting to see he and Durbin co-sponsor an amendment, though.

Omnidosiac

You make a valid point that you can’t just select quotes from politicians you agree with. Personally, Sen. Alexander is one of those that I really dislike…

However, in the end, I think that fixing our sales tax system is like putting lipstick on a pig. I haven’t seen a single online vendor, that does collect sales tax in my state, detect that I’m not in the city limits and don’t need to pay that extra local sales tax. And, the stupid exceptions for the same products: here, you pay sales tax on shipping materials to ship products, unless you’re shipping farming products.

http://www.cardinalphoto.com David Cardinal

At least the Simplification agreement is supposed to make some of those rough edges smoother, but I don’t wonder about all the local & county complexities getting handled properly.

FedTax

Someday your vendors will use TaxCloud, and the sales tax will be done correctly. ;)

SAL_e

The real problem is that by allowing the states forcing out-of-state vendor compliance with their state law is simply illogical. Effectively braking the fundamental principle on witch the union was created. This kind of behaviour will have many unattended consequences well outside our imagination. The only real solution is total overhaul of the tax system in USA. Internet changed the rules of the interstate commerce and the interstate commerce with tax collections of the interstate trade should change as well. That is exactly why the exemption on tax collection for Internet transactions was passed in the first place. But our political system is failing they had more then 10 years to solve the problem and they the Congress and the President(s) fail to do so. And the solution is quite simple. EU already had implemented it. It is called VAT (value added tax). We need to stop trying to collect sales tax and switch to VAT. That’s it.

But do you know why it will not happen any time soon… because current regime greatly benefits the big corporations and they are the biggest contributors to politicians coffers.

http://www.cardinalphoto.com David Cardinal

SAL — VAT is an intriguing idea, but I’m not sure how I see it would work as a replacement for the current state-by-state system. Would the Feds collect on behalf of all states (that would go over like a lead balloon) or would the producer’s/seller’s state get the tax no matter where the purchaser was (that would have its own issues). And what about states that don’t want to tax their residents and don’t have a sales tax? Would they de facto tax their residents and get money whether they “wanted” it or not.

I imagine the EU has addressed at least some of these issues, but they have a pretty different setup than we do currently, so that might be some help in designing a working system.

SAL_e

I was living in Europe when the sales tax was replaced with VAT and the process was quite smooth for radical change like that. I also was running small business at that time there and I was quite in opposition to the switch, but after I figured out how to work with VAT it turned out to be huge money saver for me.

Here is how VAT could work in USA.

1. I, as a vendor (Amazon, BestBuy or Joe on the left corner), sell item for $100. By law I am required to collect 20% VAT for my state and payable to the federal IRS. And report the sell to IRS. So you (the buyer) pay $120. What happens if you are:

1.1 Resident of my state… Nothing. You paid the due tax to our state.

1.2 You are resident of state that wants to collect 25%. Based on the invoice during the annual/quarterly tax return you have to pay additional 5% tax (25%-20%). Payable to IRS and transferred to your state.

1.3 You are resident of state that wants to collect 15%. Based on the invoice during the annual/quarterly tax return you have rebate of 5% from IRS (15%-20%). Paid by my state.

2. IRS (federal) will act as bank for all states. Collecting the VAT and making sure the additional payments/rebates are distributed between the states.

And with active trade between states the transfers are quite small relative to total tax revenue and the whole process could be automated, similarly how the stock exchanges are working already in real-time.

Not to mention that when you export you get your VAT back and that will restore competitiveness of US businesses engaged in world trade.

http://www.cardinalphoto.com David Cardinal

Sal — Thanks for the detailed walkthrough. Definitely plausible, at least theoretically. I don’t see our current political dynamic allowing it, though.

SAL_e

“I don’t see our current political dynamic allowing it, though.”
Exactly. That is the problem, isn’t it? It is much better earning cheap political credits by trying to control the uncontrollable and defending non-existing human rights, while you eroding the well defined human right.

SAL_e

“I don’t see our current political dynamic allowing it, though.”
Exactly. That is the problem, isn’t it? It is much better earning cheap political credits by trying to control the uncontrollable and defending non-existing human rights, while you eroding the well defined human right.

FedTax

Pursuant to the Tenth Amendment to the Constitution, “The powers not delegated to the United States (Federal Government) by the Constitution, nor prohibited by it (The Constitution) to the States, are reserved to the States respectively, or to the people.” Parentheticals added for clarity.

Sales and Use Taxes are intensely local, and have been enacted in most states more than 50 years ago.

Remember, under the proposed legislation, states do not get to force any out-of-state retailer to comply with that states laws UNLESS that state standardizes and simplifies their laws first.

SAL_e

“Sales and Use Taxes are intensely local, …” This is the key. Sales are not local any more they are global and the have been global for more then 10 years now. Time for real change, not pretty slogan on peace of paper.

And just because CA standardizes and simplifies their tax laws, it doesn’t make them applicable to resident of NV for example. NV business should not be acting as tax collector for CA, no matter how simple or standard CA law is.

BANSAK9214

I willingly pay two dollars in freight just to avoid one dollar in sales tax because I know several things: 1. The tax money will be wasted as fast as it is paid on useless layabouts or state emplyees who produce nothing, or 2. as part of wasting it, it will be used to employ ‘teachers’ to teach the next generation that capitalisim is evil, etc. and or 3. it is never enough…they either waste it, use it to attack us or give it to those who will, or use it to buy votes for candidates I detest and then complain that it is not enough. F’em.

FedTax

If you dislike your state’s sales tax, call and write your state legislators. As Mr. Cardinal points out, this isn’t about the amount of tax, its about the collection of the tax that’s due.

FedTax

Nice article – well put.

http://www.cardinalphoto.com David Cardinal

Thx.

jhewitt123

An important and useful article, thanks.
For small businesses, really small ones, compliance is next to impossible because there is no way to decide whether or not purchased items fall under the use tax umbrella, particularly when the distinction between business and personal use is intertwined, as is often the case. The list of items subject to use tax, is large, yet necessarily incredibly sparse. For example, there may be rags and toilet paper but not napkins. It can not even serve as an example list.
When the threats and penalties are exorbitant, with frequent references to compounded penalty on prior years and even decades, error the the side of caution is the only viable path. I known a guy with a small business who was audited and when the auditor failed to find legitimate flaws, got him in the end for waxing his own car in the shop parking lot, the can of wax was the problem.
The entire premise is flawed I think. If Pennslyvania, for example, really thinks its sales tax is driving buyers out of state, they can lower it. In actuality people buy out of state because that is where the product they need comes from.

http://www.cardinalphoto.com David Cardinal

You’re welcome. Thanks for the kind words.

As to your comment: Yes, and even “simplfied” will be complex. At least the under $1M rule should help. I had a great example of non-obvious tax complexity recently. It turns out (here in Ca. at least) that mandatory gratuities are taxable (while typical tips are not). This is very confusing to restaurant employees & customers, not to mention the Point of Sale system. The rationale makes some sense (if they weren’t taxable merchants could price their items at near 0 and slap on a large “mandatory gratuity”) but it is just one tiny example of the sort of thing you’re talking about.

Steve Sadler

To make it simple, use an ‘origin based’ tax. If I buy something from a store in Nevada, online or in person, pay the same tax. Nevada would get the money, not my home state. There’d be no added complexity for store and the state of Nevada would get the money.

http://www.cardinalphoto.com David Cardinal

Steve — Interesting idea, but I think it would amplify one of the current issues. Say, for example, Amazon set up shop in a no-tax state. Under the origin model it wouldn’t collect or pay sales tax at all. That might be fine with the “anti-tax” crowd, but wouldn’t work for the 45 state governments that want sales tax revenue.

http://www.facebook.com/monirhossain419 Monir Hossain

About half of my income goes to taxes. 20% of it used to train killers and make weapons of mass destruction.

LZKashmir

To protect your right to say completely stupid things like this. I’d rather you just said thanks. I don’t agree with everything our government does, but to deny the need for a military and the slander them is beyond intelligent. Signed, one of the killers who gave up six years of his life to provide the security you obviously are oblivious to.

Rolland Ellis

I am never surprized by the talking heads on the internet, they say nothing, do nothing, help nothing. They say get over it, except it. I say to those talking heads….get over it, except it, your rotten Government, the corruption, the evil doers, your part of the problem, you and others!

YAUNa

Ya clearly donna get it so I’ll s-p-e-l-l it out. B&M stores have sales tax; they don’t have shipping. I’m more than happy to support private enterprise (and even the USPS) through shipping costs as opposed to contributing more to government waste via tax. PERIOD. And, of course, it’s interesting how “State’s Rights” come to the fore where there’s money involved but not to be found (largely, some notable exceptions of late) when the Feds continue their encroachement, er, take over, of States Rights.

timbalionguy

Those of us with in States with really high sales taxes will really suffer on this one. Amazon reached a deal with our State to start charging sales tax in 2014. Amazon will lose business from me, as a result.

The concept is great– collect more taxes from me so they can spend it legislating our rights away (just spent the entire day at the Legislature, testifying to protect my rights). I’ve had enough of government for the next three lifetimes!

AlinBR

Increased cost is reality. My income isn’t rising. Less money, less spending.

charuz

Sales tax needs to be collected at the place of origin which is most commonly used as the place the vendor is located. An example can be used of purchases made at a store which is national and in some cases global. The collected tax on the purchase is based on the location of the store. The responsibility of collecting should be placed on the merchant, much like it is placed on the merchant with a physical store front and not an online one. It can also apply to place of shipment, which is why so many online companies do collect sales tax since they have warehouses in the state the purchase is being shipped to. Basically, if there is a will there is a way to simplify the process; but if one does not want to have equality in the sales world, there will be endless excuses why not.

luis3007

You Americans have the weirdest and most convoluted tax system in the continent. Why can’t you use a single national VAT tax for everything. Most nations in the world do it this way.

D L

Each state is responsible for establishing and collecting taxes within its borders. Under the US constitution, the US Government does not have such authority and it would take an amendment to that constitution to get it.

http://www.facebook.com/marius.quentical Marius Quentical

We already pay enough tax. I and others will simply stop buying online. We’ll order our goods from vendors who operate in tax free states, and if these goods are taxed federally, we’ll just cut back on purchases overall and slow the economy down until people start to suffer. I already stopped buying from Amazon…I’ll only buy from Amazon partners who do NOT charge sales tax.

D L

“None of the serious proposals … actually include any new taxes. Everyone is already supposed to be paying the tax (or an estimate of the
tax in some cases where that is allowed as an alternative). Those who
aren’t paying the tax are violating the law and cheating their state
governments out of revenue.”

There are millions of tax-exempt entities in the country and to them this would be a “new” – meaning they never paid it before – tax.

Millions of tax-paying entities also are exempt from sales taxes on certain goods for varying reasons. Those entities already account for and pay use taxes.

Once again, Federal involvement will complicate business processes and increase accounting burdens for companies.

Let the states manage their own tax collection mechanisms. Amazon’s agreement with Texas and other states proves that compromise is possible.

http://www.cardinalphoto.com David Cardinal

D L — Can you provide an example or two of either of those consequences you cite? I’m not sure what part of the proposed law would cause a tax-exempt entity to suddenly need to collect taxes? Remember the seller is not _paying_ any new taxes, merely _collecting_ taxes on behalf of buyers and forwarding that amount to the appropriate state. The sellers net revenue stays the same as before.

Similarly, if a vendor is exempt from paying sales tax, why would the new law suddenly cause them to have to pay it?

I don’t doubt that you’re right about both these cases, but I’m curious what situation would cause them.

As to the Amazon compromises, those are great, but not practical for every vendor to negotiate a compromise with every state.

D L

Under the proposed law, a state tax-exempt entity – which would not be required to pay taxes for purchases at a local business in their state – would be forced to pay taxes on their online purchases. That would effectively be a new tax for that purchaser. These would most likely be local charities, churches, schools, etc.

Under the proposed law, a state-licensed business authorized to purchase tax-free goods would be paying a new – or not paid before – tax on items purchased online. This type of business might be a graphics design studio or advertising company that purchases items tax-free at wholesale that then sells a taxable finished product that includes a portion of those tax-free items. This is the basis of the “use” tax that most states utilize. There are likely millions of businesses in the country that fall into this category.

Currently, in my state, each type of tax-exempt entity has to contact in-state sellers (either online or brick-and-mortar) with whom they do business and provide their tax-free certificates. Those in-state sellers are required to keep – and produce on request – a list of tax-free transactions. This is very much an ad hoc process and likely varies from state to state.

Under the proposed law, each state and every online vendor would need to agree on some type of exemption standard that could be used to achieve parity between local and online purchases.

Under the proposed law, I guess I am also personally worried that states with serious management problems – such as California, Michigan and New York – would look at using the legal system against online resellers in other states in order to collect taxes. The law would make it easier for those states (and their lawyers) to abuse businesses in other states.

http://www.cardinalphoto.com David Cardinal

Thanks, that’s nteresting. In California (where I live and the state with which I am most familiar), tax-exempt organizations are not exempt from paying (or in most cases collecting) sales tax, except for certain limited cases. So I’m not sure how much the changes would affect them.

As to reseller permits, I’d like to think that part of the Sales Tax Simplification requirement (that states need to adhere to in order to collect sales tax) would require them to be honored by other states, which should solve that problem.

No doubt a bunch of annoying new issues for some folks, but I’m not sure it has to be any more complex than buying & collecting within state is (since states who want to collect are required to provide software solutions free of charge to collecting merchants). We’ll see though!

techsmith2

This IS NOT Europe!!
Where does this idea come from that the government is entitled to part of everything??
The correct approach is to STOP Sales Tax on ALL goods/services. That would take away a so-called unfair advantage of selling things via the Internet.

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